Being a collection of thoughts, observations, comments, opinions and views on investing--especially for the long term.
Disclaimer: This blog is not intended as professional advice. Please seek your own professional advisor who can properly review your particular circumstances. The author disclaims any liability, loss, or risk taken by individuals who directly or indirectly act on the information contained herein. All readers must accept full responsibility for their use of this material.

Friday, April 29, 2005

What's the Likelihood of "Making It" as a "Pure" Investor?

Anyone seeking to make a fortune should spend a few minutes scanning the Forbes 2004 list of the world's wealthiest people--for in the treasure hunt for riches, it helps to know where others are finding gold before starting to dig on one's own.

To understand where the world's most well-heeled people have obtained their riches, we can examine the breakdown of sources of wealth across industries. Extending a bit further down the Forbes list to include the top 50 wealthiest people, I find:

Industry: Percentage of Top 50 on Forbes List of the World's Billionaires

I have separated out the most investor-oriented categories in order to gauge the likelihood of "making it" by being a "pure" investor who buys, holds and sells assets, as opposed to an operator of a business providing products and services.

Question: Is using one's acumen to make the right buy-sell decisions (as a value-hunting investor, arbitrageur or trader) a common road to riches with a decent chance of becoming successful, or is following a path in the manufacturing and service sector more likely to bear fruit?

As the above breakdown shows, the vast majority (86%) of the top 50 billionaires made their money primarily through traditional manufacturing and service businesses that depend on customers at the retail or wholesale level. A much smaller minority (just 14%) made their fortunes as investors in one of two categories:

1. Investments: Although only four (8%) of the top 50 billionaires made the bulk of their money directly from investments, two of these multi-billionaires appear among the top five, viz., Warren Buffett (#2) and Prince Alwaleed (#5). The other two individuals in the investments category are Kirk Kerkorian (#41) and Carl Icahn (#50), who made their money through various investments including casinos and LBOs;

2. Real Estate: The three (6% of the top 50) individuals in the real estate category are all Hong Kong citizens (by chance?, or are the rules of the real estate game somehow different in Hong Kong?)--Li Ka-shing (#22) with Hutchinson Whampoa; Raymond, Thomas and Walter Kwok (#31) with Sun Hung Kai Properties; and Lee Shau Kee (#38) with the Henderson group. Among these three, Li Ka-shing is the most diversified beyond real estate, now running a conglomerate including cell phone, retail and electricity businesses.

(Prior to tabulating this breakdown, I had expected to find more of the world's top billionaires with riches sourced from real estate, especially with the very substantial run-up in both commercial and residential real estate prices worldwide during the past five years. I plan to take a closer look at real estate wealth in another post.)

Here's my take from this quick survey of sources of wealth:

1. As American-style capitalism continues to thrive, consumer-oriented businesses (retail, manufacturing, technology) are likely to remain promising areas. There appears to be plenty of opportunity still for the next Wal-Mart or Ikea, more winning products like Mars bars and Nike shoes, or another Microsoft or Dell;

2. It is also possible--though "statistically" less likely--to make a fortune as a "pure" investor. However, for anyone with the resolve to try, an encouraging note is that "pure" investors are actually overrepresented (with Buffett and Prince Alwaleed occupying two of the top five slots--that's a hefty 40%!) among the ranks of the super-wealthy with net worth exceeding $20 billion.

Conclusion: Based on the list of the world's wealthiest people, the chance of "making it" as a "pure" investor may appear low, but spectacular success (as exemplified by the likes of Buffett and Prince Alwaleed) is certainly possible for those with the inclination and wherewithal to try.

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